Chapter 03 · How sectors differ
Exporters and the currency
An exporter that is paid in dollars and pays its staff in rupees has a currency position whether or not it trades a currency future. This chapter shows how a move in USD/INR reaches profit, and why the effect is not the same for every exporter.
The simple direction
Take a services firm that bills clients 10 million dollars a quarter and spends almost all of its costs in rupees. At USD/INR 83, the revenue is ₹830 crore. At 86, the same dollar bill is ₹860 crore. Costs have not moved. A large part of the extra ₹30 crore falls to profit, before any hedging the company has done. A move from 83 to 80 cuts ₹30 crore the other way. The company’s operating skill did not change in either case. The ratio did. Comparing two quarters of profit without asking what the average realisation rate was is a comparison of two different exchange rates wearing a trench coat.
The hedge can mute it, or move it into another line
If the company sold its expected dollars forward at 84, a later spot rate of 86 does not produce the full ₹30 crore. The extra sits as an opportunity the hedge gave up, which is the point of a hedge, and the accounts may show the hedge result in a line you will miss if you only read ‘revenue from operations’. Some companies hedge a stated percentage of the next few quarters. The annual report’s note on foreign-currency exposure and on derivative instruments tells you whether you are looking at an open position or a damped one. A company that is fully hedged will disappoint you if you bought it as a pure bet on the rupee weakening, and will protect you if you bought it as a business.
Not every exporter is the services sketch
| Business | Why the currency effect is messier |
|---|---|
| A manufacturer that imports components and exports the finished good | A weaker rupee raises both the dollar revenue and the rupee cost of the imported parts. The net effect can be small. |
| A firm that prices in dollars but competes with a rival who cuts dollar prices | The exchange-rate gain can be handed to the client as a discount. It never reaches the margin. |
| A firm with dollar debt | A weaker rupee increases the rupee value of the debt. The operating gain and the balance-sheet loss can arrive in the same year. |
| A firm that hedges heavily | The spot move shows up in the hedge line, often in a later quarter than the invoice. |
How to read one quarter without fooling yourself
Write down three numbers from the filing: the realised exchange rate the company itself discloses if it does, the growth in constant-currency or in dollar terms if it discloses that, and the hedge cover for the next few quarters. If the company does not disclose a constant-currency growth rate, you can still refuse to treat a rupee growth rate as a volume growth rate. A 12% rise in rupee revenue with a 4% weaker rupee is not 12% more work. It is something closer to 8% more work, and the something is why you read the note instead of doing the subtraction in your head and calling it analysis.
What to remember
- Dollar revenue and rupee costs mean a weaker rupee raises reported profit, before hedges.
- Imported inputs, dollar debt, and price cuts to clients can offset or reverse that effect.
- Read the hedge note. A hedged exporter is a business. An unhedged exporter is a business plus a currency position.
- Prefer a constant-currency growth figure when the company gives one.
- Do not buy an exporter solely as a currency future. You would be paying business-multiples for a macro view, and inheriting the business.